If Yale isn't smart enough to beat the market, who can?
Sep 23rd 2009 8:30AM
Updated Dec 4th 2009 3:41PM
Yale University's endowment is the second largest in the United States and it took a major hit in the last year. The interesting thing is that for years, Yale's chief investment officer, David Swensen, was widely respected as an investment guru. Unfortunately, the trendy touchstones of his investment strategy did not look so smart last year.
And it leaves open an unpleasant question: When you consider that the smart money -- people who run the biggest pools of money -- charges 2 percent of assets and 20 percent of the profits it earns for clients, is the smart money really smart? Or did it just get into the right clubs that all breathe the same rarefied air and follow the same investment strategies? And if the smart money is no smarter than the rest of us, what's the point of trying to predict the future and invest in it?
These questions come to mind when examining the details of Yale's recent performance. Its endowment fell 24.6 percent in the year ending June 2009 -- "beating" the 18 percent median decline of large university endowments. And the biggest hits came in the parts of its portfolio that had previously been seen as works of investment genius.
To wit, Yale's largest category of assets -- the ironically-dubbed "real asset" category -- which includes real estate, commodities and timber -- fell 33.9 percent -- more than all the others. Yale's energy investments lost 47 percent. Its leveraged buyout and venture capital investments lost 24 percent of their value. Meanwhile, Yale's more prosaic investments in stocks and bonds declined a mere 13 percent.
As part of a club, Yale is not alone in its Ivy League misery. Harvard's endowment fell 27 percent to $26 billion and it laid off 275 people. And Stanford's endowment, which tumbled 30 percent to $12 billion, prompted the loss of 472 jobs in sunny Palo Alto.
But fret not for Yale. Despite budget cuts, Yale plans no layoffs and it still has $16.3 billion left in its endowment -- down a mere $6.6 billion from where it stood the year before. Although I have to say that I am puzzled at how Yale arrived at the mere 24 percent decline in its private equity investments, since so many of those are likely not traded on public markets.
Perhaps there's less to Yale's endowment than meets the eye. And those who say that it's hard to beat the market are looking smarter all the time.